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The Supreme Court Just Handed American Express a Major Victory

The Court rules that the credit card giant's "anti-steering" provisions do not violate antitrust law.

The controversy erupting from the recent rulings of the Supreme Court of the United States (SCOTUS) on immigration policy and trade unions pushed an important decision down in the headlines. This was SCOTUS's ruling that American Express(NYSE:AXP) is not running afoul of U.S. antitrust laws by requiring merchants to abide by its "anti-steering" provisions.

This is quite a win for American Express, and it'll have repercussions for the broader credit card industry. Here's why.

Image source: American Express.

Steering to a win

In 2010, the federal government and a handful of states took several credit card companies to court, claiming that the anti-steering provisions violated the Sherman Antitrust Act. Visa and Mastercard settled, while AmEx soldiered on. The case made its way through the system until finally landing on SCOTUS' docket. The Supreme Court ruled conclusively and unambiguously that anti-steering provisions do not violate antitrust law.

"Steering" refers to the practice of merchants encouraging customers to use one (or more) method(s) of payment in favor of another, either through discounts or direct requests ("Bob's Beanz Prefers Visa and Mastercard"). The process tends to be at AmEx's expense because the company charges its merchants higher per-transaction fees than its eternal rivals Visa(NYSE:V) and Mastercard(NYSE:MA).

Cut to compete

The positive effect of the ruling on AmEx's business is clear. The company now is insulated against Bob and his preference for Visa and Mastercard with their slightly lower rates. The anti-steering provisions stay, and merchants that agree to them have to play nice.

This directly helps AmEx because it protects those higher per-transaction fees -- known as the discount rate in AmEx-speak -- which help fund the company's relatively generous rewards program. This, in turn, encourages the company's well-heeled clientele to keep AmEx cards in their wallets and use them to buy things.

Still, the "don't leave home without it" company can't rest easy on its victory. The trend in transaction fees is down, thanks in no small part to the enduring dominance of Visa and Mastercard. According to the Financial Times, around 1.3 million fewer American businesses accept American Express than its rivals.

AmEx clearly wants to close that gap. In March, the company announced that it was reducing its discount rate by 5 to 6 basis points, to roughly 2.37%, the deepest cut it's made in 20 years.

The Financial Times estimated that this move will cost the company around $585 million. That might prove worth it, though, if AmEx can gain acceptance at some of the (still very many) merchants that only grant it to Visa and Mastercard.

This Fool's take

Ultimately, I think this ruling, combined with the general competitive trends in the industry, will help level the playing field.

With the discount rate cut, AmEx is trying to be more on par with its rivals in terms of presence. If it makes significant progress, we can expect Visa and Mastercard issuers to up their games slightly with rewards programs and perks -- this in contrast to AmEx as Visa and Mastercard do not issue any credit or manage rewards programs. These fall to the banks and other financial businesses that issue the cards.

We'll see if AmEx's push is successful. Regardless, this Supreme Court decision matters and it's going to impact the credit card business going forward. We'll soon find out by how much.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool owns shares of Visa. The Motley Fool has a disclosure policy.

Author

Eric has been writing about stocks and finance since the mid-1990s, when he lived in Prague, Czech Republic. Over the course of a varied career, he has also been a radio newscaster, an investment banker, and a bass player in a selection of rock and roll bands. A native New Yorker, he currently lives in Los Angeles.